Grenergy

16/05/2020

Company Background

Grenergy is an independent energy producer through the development, financial structuring, building, operation and maintenance of large-scale renewable energy plants.

Its headquarters are in Spain. It was founded in 2007 and it joined the stock market in 2015.

Spain and Chile are its main markets, however, it also has projects in Mexico, Colombia, Argentina and Peru.

What is the business of the company?

The company builds and develops solar and wind farms. Some of the farms it builds are to own, and others are to sell. This strategy allows Grenergy to obtain some revenue at the same time that it develops its assets and expand its operations.

Grenergy has three business lines: 

  • D&C (development & construction). This is the main business of Grenergy and in 2019 represented more than 95% of its revenue
  • Energy (sale of energy when Grenergy owns the plant). This segment is expected to grow in the future when Grenergy starts to own its solar and with farms (2020). This is stable cash flow as the sale of energy is agreed in large contracts (PPA) of 10-12 years.
  • Services (asset management + operation + maintenance), this segment will increase its weight in the future when they start to sell the projects and start the maintenance of them

Currently, they are developing 390 MW to own and 72 MW to sale.

What is its current situation?

The company is expanding considerably in Spain and Latin America. It is expected to develop 234MW (60MW of WIND power and 174 of Solar PV) in 2020 and more than 1GW in the next five years. It has a backlog of 463MW where all of them are from Solar PV projects.

Their main three projects to be finished in 2020 (current status under construction) are:

  • Quillagua project (103MW) on track. Expected to be connected in Q3 20 
  • Kosten project (24MW) in commissioning phase. It was expected to be connected in 1Q20. However, the German company in charge of the turbines went bankruptcy, so it is being delayed. It is expected to be working in the second half of the year.
  • Duna & Huambos project (60MW) on track. Scheduled to be connected in 2Q20. Moreover, the capital needs for the backlog projects are mostly funded 
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Why is Grenergy a good company to invest in?

The present and the future is green. Grenergy started in 2007, and it is in an excellent position to take advantage of this trend.

Its backlog and pipeline of the company are impressive. Bloomberg estimation for Grenergy’s EPS in 2022 is 2€. If we do a quick math operation, and we consider a PE of 20 (standard for companies in the growth phase), we obtain 40€/share in 2022. I personally see it a little optimistic because they are not immune to the effects of COVID-19 and other potential unexpected events. However, the company’s growth rate is vast, and it is expected to continue on this track in the future.

We believe that the small caps have suffered considerably in the stock market during this crisis. Grenergy was being traded around 16€/share in March(before arriving at almost 20€/shares weeks before) and currently is around 11€. This company has a bright future.

Its founder has around 75% of the company shares. Consequently, the views of the management are aligned with the interest of the shareholders.

What are the main risks associated with investing in Grenergy?

Its projects require an important upfront. As a result of its quick expansion, it needs to ask for money to be able to finance all of them. As a result, there is a risk related to having problems with payments tied to that debt in the future. It will be the case if the expansion pace grows without control. On the other way, having negative interest rates, it is an excellent moment to rely on debt if the amount is not excessive.

Energy prices risk: They are pursuing PPA agreement to ensure the sale of the electricity produced at a fixed rate during the 10-12 years of the contract.

A considerable part of its portfolio is in Latin American countries. Those countries are suffering the devaluation of its currencies because of the QE from the FED, a consequence of COVID-19.

Valuation

•    Due to problems related to the project Kosten (Argentina), which was one of the four that they expect to initiate in 2020, and the delay in obtaining some permissions in Spain (Escudero’s project – 200MW), we have forecasted an EBITDA of 22.5M€ for 2020. It is far from the 32M€ EBITDA expected by Grenergy at the beginning of the year.

•    We estimate a growth of 22% from 2021 to 2024 and 7% from 2025 to 2029.

•    Increment of CAPEX align with the increment of sales.

•    Taxes 18.22% (average of last 3 years)

•    WACC = 6.94%

•    Terminal growth rate = 3%

•    EBITDA multiple = 12

Conclusion

Grenergy is a growth company in a sector which is growing, and it is set to continue this way during the next 20-30 years. It is a small-cap and there are risks linked to this. However, we believe that this company has a huge potential and following our assumptions and calculations, its target price is 28.54€ (horizon 24 months). It represents a 148% potential revalorisation.

Annex

Disclaimer: This analysis is not a buy recommendation. It is only my point of view about the expected FCF of the company in the future with the information I have.